COMPANY UPDATE

Monday, October 25, 2021

FBMKLCI: 1,588.08
Sector: Consumer

THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*

Hup Seng Industries Berhad TP: RM0.98 (+7.6%)

Last Traded: RM0.91
HKCC Raised Concerns over Biscuit Consumption Sell (ESG: ★★★)
Jeff Lye Zhen Xiong, CFA Tel: +603-2167 9730 jefflye@ta.com.my www.taonline.com.my

Last week, Hong Kong Consumer Council (HKCC) raised concerns over Share Information
Bloomberg Code HSI MK
excessive consumption of biscuits and Ministry of Health is said to have
Stock Code 5024
initiated examination over Hup Seng to make verification on the claims Listing Main Market
by HKCC. Hup Seng has reiterated that its crackers manufactured and Share Cap (mn) 800.0
Market Cap (RMmn) 728.0
marketed in Malaysia are fit for human consumption and would extend
52-wk Hi/Lo (RM) 1.03/0.905
fullest cooperation to the authorities in their investigation. We 12-mth Avg Daily Vol ('000 shrs) 461.5
maintain Sell with an unchanged target price of RM0.98/share at this Estimated Free Float (%) 28.6
Beta 0.3
juncture as the finding is expected to create short-term negative news
Major Shareholders (%)
flow over Hup Seng and near-term downside bias on share price. HSB Group Sdn Bhd 51.0
Nevertheless, we believe it would not materially derail the growth Cekap Kapital Sdn Bhd 2.4
Norges Bank 2.0
projection of the group, making a price drop towards RM0.87 and below
an attractive accumulation level for long-term dividend seeking Forecast Revision
investors. FY21 FY22
Forecast Revision (%) - -
Net profit (RMm) 32.1 41.7
HKCC Raised Concerns over Excessive Consumption of Biscuits Consensus 33.0 39.9
Last week, the Hong Kong Consumer Council (HKCC), an independent TA's / Consensus (%) 97.2 104.4

statutory authority in Hong Kong released results of its study on the pre- Previous Rating Sell (Maintained)

packaged biscuits based on off-the shelf pre-packaged biscuits available on Hong

Financial Indicators
Kong market and reported following findings: FY21 FY22
Net debt/equity (%) Net Cash Net Cash
i) All 60 samples tested within the study contained strains of cancer- ROE (%) 23.3 30.5
ROA (%) 14.1 18.3
inducing contaminants i.e. glycidol and/or acrylamide;
NTA/Share (RM) 0.2 0.2
ii) 85% of samples were high in fat, sugar or sodium; and Price/ NTA (x) 5.4 5.3
iii) 40% of samples were not compliance with the standard of nutritional
labelling. Share Performance (%)
Price Change HSI MK FBM KLCI
1 mth (3.2) 3.9
Among the products tested, we understand some of the biscuits sampled are 3 mth (7.1) 4.0
also available in Malaysia such as Hup Seng Special Cream Cracker, Oreo Mini, 6 mth (2.7) (1.2)

Ritz Cracker, Jacob’s Original Cream Cracker and Julie’s Lemon Puff Sandwich. 12 mth (0.5) 6.0

Following HKCC’s findings, Malaysian Ministry of Health is said to have initiated

(12-Mth) Share Price relative to the FBMKLCI
examination over biscuit makers in Malaysia, including Hup Seng, to make
verification on the claims by HKCC.

Hup Seng Reiterated Crackers Fit for Human Consumption

It is great that HKCC is contributing towards food science, empowering
consumers and raising health awareness of consumers. In our opinion,
excessive consumption is always undesirable yet one might not want to jump
into conclusion preliminarily based on eyes-catching headlines over the social
media. Source: Bloomberg

A search over the resource centre of HKCC’s website would reveal that
HKCC has been very active in conducting research over consumer products
with research articles published monthly. Products examined by the HKCC
include food, personal care products, household appliances and others.
Interestingly, HKCC has published a study on cookies and pastries back in
early-2019 with similar concerns raised over cancer-inducing contaminants,

Page 1 of 5
 25-Oct-21
nutrition contents and non-compliance over nutritional labelling. Although we
do not have full clarity over the follow-through events after the 2019 research
finding, there was no available news in the internet stating that all the cookies
and pastries were withdrawn from market shelf following the 2019 research,
and sales of cookies alongside pastries are still available in Hong Kong today.
Furthermore, some of the other food products which were previously
reported to contain carcinogenic components also include crispy snacks, dried
spices, infant formula, canned fish, margarine and cooking oil.

Separately, it is worth noting that factory premises of Hup Seng hold HACCP
and GMP certifications through Malaysia Ministry of Health. Management of
Hup Seng has also reiterated that its crackers manufactured and marketed in
Malaysia are fit for human consumption, and are in compliance with the local
regulation, quality standards and food safety standards.

Short-Term Negative News Flow Would Not Derail Growth

Putting the short-term negative news flow on biscuit players aside, we would
like to bring your attention towards PepsiCo Inc, an American multinational
food, snack and beverage corporation to illustrate that even products that are
generally perceived to be less healthy can grow steadily overtime. It is of no
secret that crispy snacks are consumed primarily for leisure instead of
nutritional purpose and HKCC has also once published that crispy snacks on
Hong Kong market contain carcinogenic contaminants. Nevertheless, Frito-Lays
North America, an operating segment of PepsiCo that focus on manufacturing
and selling branded snack foods in North America had grown at a CAGR of
5.5% during 2018-2020, outperformed PepsiCo’s CAGR of 4.3%. Moreover, the
growth momentum of the snack segment continued into 2021 with 9MFY21
revenue grew by 5.5% YoY. Some branded snack food of Frito-Lay North
America includes Cheetos cheese-flavoured snacks, Doritos tortilla chips,
Fritos corn chips and Lay’s potato chips.

Figure 1: Revenue of PepsiCo Inc

90,000
2018-2020 CAGR: 4.3%
80,000
70,372
70,000 67,161
64,661
60,000 54,226
USD ('mn)

47,917
50,000

40,000

30,000

20,000

10,000

-
2018 2019 2020 9MFY20 9MFY21

Source: PepsiCo, TA Securities

Page 2 of 5
 25-Oct-21

Figure 2: Revenue of Frito-Lay North America

25,000
2018-2020 CAGR: 5.5%
20,000 18,189
17,078
16,346

15,000 13,441
USD ('mn)

12,746

10,000

5,000

-
2018 2019 2020 9MFY20 9MFY21

Source: PepsiCo, TA Securities

Impact
We make no changes to our earnings forecast.

Recommendation
The HKCC’s finding is expected to create short-term negative news flow over
Hup Seng and some near-term downside bias on Hup Seng’s share price
performance, yet we believe it would not materially derail the growth
projection of the group. While we maintain Sell on Hup Seng with an
unchanged DDM-driven target price of RM0.98/share (k: 8.8%, g: 2.5%) at this
juncture, we believe a drop in price towards RM0.87 level and below would
make the share more attractive to long-term dividend seeking investors. Hup
Seng has a healthy net cash position of RM58mn as of 2QFY21 and we project
it to distribute 5 sen and 6 sen DPS in FY22 and FY23 respectively.

Valuation Method
DDM Valuation
Rf 3.0%
Rm 12.0%
Beta 0.6
Discount Rate 8.8%

Total NPV (RM'mn) 784.0

Share Outstanding (mn share) 800.0
DDM/share 0.98

Page 3 of 5
 25-Oct-21
Earnings Summary
FYE Dec 31 (RMmn) FY19 FY20 FY21E FY22F FY23F FYE Dec 31 (RMmn) FY19 FY20 FY21E FY22F FY23F
Revenue 309.5 327.3 332.9 344.6 356.8 PPE 79.4 76.5 74.7 73.0 71.5
Gross Profit 105.3 104.6 93.1 107.9 114.4 Investment properties 1.5 1.4 1.4 1.4 1.4
EBITDA 57.0 60.1 47.9 60.6 65.2 Deferred tax assets 0.2 0.4 0.4 0.4 0.4
EBIT 50.8 53.3 41.4 54.3 59.0 Others 5.8 5.6 5.6 5.6 5.6
Reported PBT 53.5 55.0 43.4 56.3 61.0 Total Non-current assets 86.8 83.9 82.1 80.4 78.8
Reported Profit 38.9 40.4 32.1 41.7 45.1
Adj Net Profit 39.6 41.8 32.1 41.7 45.1 Inventories 24.3 29.7 26.1 27.0 28.0
Basic EPS (sen) 4.9 5.0 4.0 5.2 5.6 Receivables 36.8 32.0 39.6 41.0 42.5
Adj EPS (sen) 5.0 5.2 4.0 5.2 5.6 Prepayments 0.7 0.6 0.6 0.6 0.6
GDPS (sen) 6.0 6.0 4.5 5.0 6.0 Cash and equivalent 85.5 82.6 77.5 80.5 78.9
Total Current assets 147.4 144.9 143.8 149.1 149.9
CASH FLOW
FYE Dec 31 (RMmn) FY19 FY20 FY21E FY22F FY23F Total Assets 234.2 228.8 225.8 229.5 228.7
PBT 53.5 55.0 43.4 56.3 61.0
Payables 53.1 56.1 57.1 59.1 61.2
Adjustments for: Taxation 3.0 4.9 4.9 4.9 4.9
D&A 6.2 6.7 6.5 6.3 6.2 Dividend payable 16.0 16.0 16.0 16.0 16.0
Net interest (2.7) (1.7) (2.0) (2.0) (2.0) Others 3.1 3.6 3.6 3.6 3.6
Others 2.9 0.7 0.0 0.0 0.0 Total Current liabilities 75.2 80.7 81.6 83.6 85.7
Op profit before WC 59.9 60.8 47.9 60.6 65.2
Deferred tax liabilities 7.1 6.8 6.8 6.8 6.8
Inventories 1.0 (5.5) 3.6 (0.9) (1.0) Total Non Current liabilities 7.2 8.3 8.3 8.3 8.3
Receivables (1.7) 4.4 (7.6) (1.4) (1.5)
Prepayments 2.9 0.2 0.0 0.0 0.0 Share capital 80.0 80.0 80.0 80.0 80.0
Payables 4.1 0.6 1.0 2.0 2.1 Retained earnings 71.8 59.8 55.9 57.5 54.6
Tax (15.0) (13.3) (11.3) (14.6) (15.9) Total Equity 151.8 139.8 135.9 137.5 134.6
CFO 51.2 47.1 33.6 45.7 49.0
Total Equity and Liabilities 234.2 228.8 225.8 229.5 228.7
Acquisition & capex (16.7) (3.8) (4.7) (4.7) (4.7)
Interest income 2.7 1.7 2.0 2.0 2.0 FINANCIAL RATIOS
Others 0.3 4.2 0.0 0.0 0.0 FYE Dec 31 (RMmn) FY19 FY20 FY21E FY22F FY23F
CFI (13.7) 2.1 (2.7) (2.7) (2.7) PER (x) 18.4 17.4 22.7 17.5 16.1
P/NTA (x) 4.8 5.2 5.4 5.3 5.4
Dividend paid (48.0) (48.0) (36.0) (40.0) (48.0) Dividend yield (%) 6.6 6.6 4.9 5.5 6.6
CFF (48.3) (48.3) (36.0) (40.0) (48.0) ROE (%) 25.6 28.7 23.3 30.5 33.1
ROA (%) 16.8 18.1 14.1 18.3 19.7
Net Cash Flow (10.8) 1.0 (5.1) 3.0 (1.7) EBIT margin (%) 16.4 16.3 12.4 15.8 16.5
Net margin (%) 12.8 12.8 9.6 12.1 12.6

Page 4 of 5
 25-Oct-21

(TH I S P A GE IS IN TE N TI ON AL L Y L E F T B L AN K )

Stock Recommendation Guideline

BUY : Total return within the next 12 months exceeds required rate of return by 5%-point.
HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point.
SELL : Total return is lower than the required rate of return.
Not Rated: The company is not under coverage. The report is for information only.
Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return
if dividend discount model valuation is used to avoid double counting.
Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium.

ESG Scoring & Guideline

Environmental
Scoring



Implemented efforts in improving
energy efficiency and recycling
packaging materials. However, score
Remark is muted owing to absence of
quantifiable goal for near future.
Social Governance Average










Continuous innovation for healthier The board has decent gender
food options. Extensive trainings diversity though is short of 1
conducted. independent director to meet the
50% majority. Although dividend is
distributed consistently, Hup Seng
does not have dividend policy.

★★★★★ (≥80%) : Displayed market leading capabilities in integrating ESG factors in all aspects of operations, management and future directions.
★★★★ (60-79%) : Above adequate integration of ESG factors into most aspects of operations, management and future directions.
★★★ (40-59%) : Adequate integration of ESG factors into operations, management and future directions.
★★ (20-39%) : Have some integration of ESG factors in operations and management but are insufficient.
★ (<20%) : Minimal or no integration of ESG factors in operations and management.
Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without
notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this
document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.

As of Monday, October 25, 2021, the analyst, Jeff Lye Zhen Xiong, who prepared this report, has interest in the following securities covered in this report:
(a) nil

Kaladher Govindan – Head of Research

TA SECURITIES HOLDINGS BERHAD (14948-M)

A Participating Organisation of Bursa Malaysia Securities Berhad
Menara TA One 22 Jalan P. Ramlee 50250 Kuala Lumpur Malaysia Tel: 603 – 2072 1277 Fax: 603 – 2032 5048

Page 5 of 5